James Staten's Blog

Forrester took more than a thousand inquiries from clients on cloud computing in 2010, and one of the themes that kept coming up was about which applications they should plan to migrate to infrastructure-as-a-service (IaaS) cloud platforms. The answer: Wrong question.

What enterprises should really be thinking about is how they can take advantage of the economic model presented by cloud platforms with new applications. In fact, the majority of applications we find running on the leading cloud platforms aren't ones that migrated from the data center but ones that were built for the cloud.

A lot of the interest in migrating applications to cloud platforms stems from the belief that clouds are cheaper and therefore moving services to them is a good cost-saving tactic. And sure, public clouds bring economies of scale shared across multiple customers that are thus unachievable by nearly any enterprise. But those cost savings aren't simply passed down. Each public cloud is in the profit-making business and thus shares in the cost savings through margin capture.

For enterprises to make the most of a public cloud platform, they need to ensure that their applications match the economic model presented by public clouds. Otherwise, the cloud may actually cost you more. In our series of reports, "Justify Your Cloud Investment" we detail the sweet spot uses of public cloud platforms that fit these new economics and can help guide you towards these cost advantages.

But job one when building a strategy for IaaS success is focusing on new applications and services that can be built to best take advantage of these economics. We all know that clouds deliver agility, letting your developers gain access to resources and build new services faster and at lower cost. More-abstracted services such as platform-as-a-service (PaaS) and discrete cloud services that can be integrated with custom code running on IaaS and PaaS can speed up time-to-market even more. But understanding the cost model and mapping that to the revenue model associated with the services you are building is key to making the most of these investments. This is how Netflix, the Associated Press, Pathwork Diagnostics, NVoicePay, and hundreds of other companies are improving their profitability by building anew for the cloud. They are taking payment before spending to fire up certain services, splitting services between pay-per-use and subscription platforms based on which option gives the right cost advantage to what parts of the application, and spinning up services on demand and rapidly turning them off when not needed.

In many cases, the new services being created in the cloud are directly tied to revenue generation — delivering value in new ways, accelerating business insight so costs can more quickly be identified and taken out, or providing vastly cheaper ways to do what has been done before. The reason the business (and not IT) does this is because it understands how revenue is generated and how the costs of the business impact the profitability of the company. We in IT often have no clue how the actions we take, the applications we build, and how we operate them affect the profitability of our company's products and services or the business bottom line. Sure, we may know what percent of company spend goes to IT, but do we know the cost breakdown for our top three services or products and what we contribute to them? If the business came to us with an idea for a new service, do we honestly believe we could advise them on how that service could be built most cost effectively? How many of you could propose a new service to the business and show the profit impact of that investment? Could you explain the profit impact of doing it in house versus in the cloud?

At Forrester's Enterprise Architecture Forum in San Francisco this week, I'll be leading an interactive session on cloud economics where we will discuss the tools cloud platforms provide for affecting service profitability and how you can apply them to your business. If you are putting applications in the cloud, bring those stories so we can discuss them and make them better. I look forward to seeing you there.

Comments

Great post, James. Here's a case-in-point on the economics of cloud for new applications:

Wiggio, a very cool cloud-based collaboration suite running on Amazon EC2 and S3 went from concept to business-worthy product in two years for less than $2.5M invested (and probably a good chunk of that still in the bank). Ten years ago, it would have taken $25M to build a software company that could even approach this level of functionality. Cloud has three benefits to Wiggio and it's customers:

1. The product exists and is getting better every month. Cloud makes that pace of innovation possible.
2. The product exists because it integrates other cloud services for things like audio conferencing. Cloud makes that integration and independent innovation possible.
3. The product deals with the very challenging B2B collaboration scenario because it's hosted and uses an email-style invitation process. The cloud makes that access and permissioning model possible.

We need to understand that cloud is not a net-new concept, just a architectural framework to be adopted for benefit. It applies to new workloads and existsing. At "new economics" is not limited to cost savings.

Thanks for your comments, Brad. You are correct that the discussion should not be black and white but the flow of questions are showing too much focus on moving existing. While you rightly point out that there are definitely cost advantages clouds can bring to certain apps already running in enterprise data centers, there are more existing apps that should not move than there are those that should. And the core value clouds provide is agility and speed to market, which are meaningless with existing apps.
The point of this blog post is to shift the focus to new, where the cloud can deliver greater gains to your organization.
As for the comment in your blog about there being a variety of IaaS cloud solutions out there, we all need to be conscious that there are more solutions calling themselves cloud but not delivering cloud economics. That's just outsourcing.